ASIC's draft rules for share trading shine a spotlight on 'dark pools'

Dark pools are private trading venues where institutions can buy and sell shares without publicly revealing their identity or sometimes even that a trade has taken place. They let large orders be executed away from the public order book, which can hide information about who is trading and the size of transactions.

ASIC is worried that if too much trading moves into dark pools it could reduce the quality of price information in the public sharemarket. That weaker price discovery could hurt ordinary investors who rely on transparent market prices when making investment decisions.

ASIC’s consultation paper proposes that dark pools should only accept orders larger than $20,000 and that dark pool operators must regularly report to ASIC on the nature and volume of their trades. These measures aim to limit potential harm to price transparency.

If a significant portion of trading happens in dark pools, public market price signals can become less reliable. That may lead to misleading or less informative prices on the exchange, making it harder for everyday investors to judge fair value and potentially exposing them to poorer outcomes.

ASIC raised concerns about the rise of high-speed computerised trading, citing its role in the 'flash crash' that hit US markets on May 6 last year. The regulator wants to avoid situations where investors see stocks traded at meaningless prices and lose confidence in the market.

No. The draft rules cover competition to the Australian Securities Exchange, high-frequency trading and dark pools, but they do not address issues raised by the Singapore Exchange’s takeover bid for ASX, which is still awaiting regulatory approval.

ASIC Commissioner Shane Tregillis commented on the issue, saying 'there's a very active debate about where those tipping points might be,' referring to how much dark pool activity could start to harm price quality in public markets.

ASIC invited submissions on its consultation paper and set a deadline for feedback. According to the paper, feedback is due by January 21.